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YEESH, WHAT THE HECK has happened to technology stocks? Investors lately have developed a distinct loathing for the sector, with large-cap tech singled out for special derision. The sector is experiencing a level of disdain that hasn't been seen for eons: Bernstein Research analyst Toni Sacconaghi pointed out in a fascinating research report last week that tech shares lately have dropped to their lowest valuation, relative to the S&P 500, in nearly 20 years.

Sacconaghi writes that tech stocks now trade at 1.0 times the S&P on a forward P/E basis, a valuation last seen in March 1991 and dramatically below the historical average since 1977 of 1.31 times. This comes while the cash on tech balance sheets is at or near record levels, both in absolute terms and relative to the stocks in the S&P.

And note that whatever it is that ails tech is widespread, with similarly depressed valuations afflicting hardware, software and services companies alike. Not least, keep in mind that the valuation compression has largely taken place over just the past few years–at the end of 2007, tech stocks traded at 1.32 time the S&P multiple on forward earnings, right in line with the sector's historical average.

The obvious question is the one I asked in this column's first sentence: What the heck is wrong? Tech companies have mountains of cash; technology continues to gradually eat up more and more of corporate capital spending, and consolidation seems to be accelerating. What's not to like?

• THE STOCKS MAY BE GETTING PUNISHED for weak earnings quality: Sacconaghi observes that of the six large-cap hardware companies he formally covers, just one–
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(AAPL)—reports GAAP results. The rest exclude amortization of intangibles or stock-option expense or both. Indeed, Sacconaghi notes that 10 of the top 20 tech outfits by market cap exclude at least one of those factors, while just two of the top 20 non-tech names exclude amortization, and none – none! —exclude options expense. "This suggests that investors may be discounting tech earnings, relative to the market, due to their non-GAAP reporting," he writes.

• A PERCEIVED INCREASE IN THE RISK of overseas competition: Sacconaghi says investors fear that increased competition in services (from India), PCs (from Taiwan) and networking (from China) will drive down margins and earnings power. But he adds that these trends are not new, and that many U.S. vendors have boosted their offshore presence in recent years, helping to improve their operating margins.

At least two of these issues could be easily addressed. For starters, techs could abandon their EPS-obfuscating preference for non-GAAP accounting and instead follow the rest of Corporate America. More significantly, they could start sharing some of their cash with shareholders.

In another report last week, Morgan Keegan analyst Tavis McCourt theorized that the mammoth amounts of cash on tech-company balance sheets are actually destroying equity value over time. He argues that:

• Large technology companies have spent more than a decade hoarding cash both overseas and domestically…

• …Knowing this, entrepreneurs and venture-capitalists have teamed up to start more companies, on the theory that if the startups found even modest success, large public companies might overbid for their assets, "as these large cash hoards create an auction environment for any company with valuable technology."

• …as it becomes clear it won't be returned to holders, but instead used to buy small rivals at unattractive prices…

• …resulting in P/E ratios for large techs below those in other industries with lower growth prospects.

To McCourt, the basic problem is that "essentially all the profits the industry generates in a given year ultimately get reinvested back into the industry, creating increased competition, lower prices and ultimately lower returns in investment." His solution: big regular dividend payouts, which could attract more investors, boosting share prices on average by as much as 77%. (Barron's Andew Bary further explores McCourt's thesis in "Tech's Payout Problem.")

A related note: Bernstein communications equipment analyst Jeff Evenson last week zeroed in on the lack of dividends from Cisco, observing in a client note that it is the fourth-largest non-payer of dividends in the S&P 500–after Google, Apple and
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(BRKB)–despite boasting the third-largest net-cash balance among nonfinancials in the index. Evenson points out that CEO John Chambers has been saying for years that Cisco will pay a dividend…some day. With the stock basically unchanged since 2002–after $65 billion in buybacks by the company–Evenson thinks that time is now.

As it happens, Cisco meets with analysts Tuesday. You can bet that Chambers will be grilled about when holders will get their share of the tech giant's mounting cash pile.

Apple Blinks

The Nasdaq Composite rose 0.4% for the week, to 2243. Adobe shares jumped after Apple relaxed a policy against the firm's programming technology.